FSC’s dividend reduction call is positive: Moody’s

EXPANSION IN CHINA:The ratings agency said the FSC was supporting banks’ moves to reduce dividends to boost capital ahead of adding branches overseas

By Crystal Hsu / Staff Reporter

The Financial Supervisory Commission’s (FSC) recent advisory for domestic banks to reduce cash dividends, but keep more earnings for long-term capital adequacy planning, would have a positive impact on lenders’ credit profiles, Moody’s Investors Service said in a note yesterday.

“The regulator’s directive will steer Taiwanese banks toward retaining more internally generated capital to strengthen their capital adequacy and support their business growth, especially in relation to expansion in China,” associate analyst Ginger Kao (高玟君) said.

The comments came after the commission met with the heads of the nation’s 16 financial holding companies last week and a week earlier to gain a better understanding of their operations and development plans.

Commission Chairman Chen Yuh-chang (陳裕璋) told reporters he also urged the companies to set prudent dividend policies and prepare banking subsidiaries for stricter capital requirements under Basel III rules. The call amounts to an official endorsement of the trend to diminish cash dividends, although the commission has yet to make clear whether Taiwan would fully adopt Basel III, Kao said in the note.

Taiwanese banks are at best average in terms of capital adequacy when compared with global peers, the ratings analyst said. The banking sector’s Tier 1 capital adequacy ratio stood at 9.05 percent, with the overall capital adequacy ratio at 11.68 percent, as of the third quarter last year.

Between 2006 and 2009, most of the banks in Taiwan that are rated by Moody’s distributed more than 50 percent of their earnings as cash dividends, the agency said, adding that most of them were either banking arms of financial holding parents or partially owned by the government.

Banks then started to lower cash dividends to strengthen capital ahead of the introduction of the Basel III regime, the ratings agency said.

The state-run First Commercial Bank (第一銀行), the banking unit of First Financial Holding Co (第一金控), lowered its cash payout for 2010, the agency said.

In addition, despite its role supporting the government’s fiscal budget, Land Bank of Taiwan (土地銀行) significantly reduced its cash dividend payments, lowering the payout to 75 percent for 2010, down from 128 percent for 2008 and 135 percent for 2009.

The increased earnings retention was particularly important for Land Bank, given its relatively weak capitalization, Moody’s said.